ANALYSIS: Happy 2025 and I hope everyone was able to get some semblance of a break over the Christmas-New Year period. At the end of my final column for 2024 written on December 17, I wrote “2025 is likely to be a year of mild economic recovery, mild declines in interest rates, and mild upward movement in prices and turnover in the real estate market.” In the past four weeks do things look any different? No.

Consider the outlook for interest rates. My warning for some months has been that underlying business pricing pressures (the need to rebuild margins) mean that as our economy improves slowly through 2025, businesses will seek to raise prices when they feel they can get away with it. Support for this view came just before Christmas in the ANZ’s monthly Business Outlook Survey.

Discover more:

- Hated house features: What buyers and agents can’t stand at open homes  

Start your property search

Find your dream home today.
Search

- House prices at the bottom of NZ - reality of life on Stewart Island

- 'No one’s judgey' - The town where buyers are ditching the mortgage

Whereas in June a net 35% of businesses said they plan to raise their prices in the coming 12 months, this rose to 42% in November, then 43% in December. Pricing plans are rising, not falling. This tendency was confirmed in the just-released Quarterly Survey of Business Opinion from NZIER. Whereas on average in the September quarter a net 7% of businesses said they plan to raise their selling prices, now a net 15% are planning to do so.

This is still below the average of 21% and tells us that scope exists for the Reserve Bank to cut the cash rate again come the next review on February 19. But at best the cut will be 0.5% and it may be just 0.25%. Where might the Reserve Bank caution come from to justify just a 0.25% reduction? Developments offshore.

In the United States market expectations for easing monetary policy by the Fed this year have fallen away steadily in recent months then declined with a thud this week following far stronger than expected strength in the jobs market. The feeling amongst analysts increasingly is that the US monetary authority will be less and less feeling inflation risks lie on the downside and that extra job-creating stimulus needs to be applied to the US economy.

There is a risk that fixed mortgage interest rates will not fall by all that much this year. Photo / Fiona Goodall

Independent economist Tony Alexander: "Potential is high for all of us forecasters to be severely embarrassed." Photo / Fiona Goodall

Some analysts in fact now think the first cut by the Fed last year of 0.5% was a mistake and one or two are now predicting that no further cuts will in fact occur this cycle. That seems unlikely but the main impact has been some sharp increases in US wholesale interest rates, which have boosted the US dollar and led to this week’s media headlines of the NZ dollar falling to just above US 55 cents from 62 cents in October.

Our central bank will surely be wondering if the new examination of a cyclical rise in inflationary pressures in the US means attention needs to shift to this development here as well. My view is that it does and hence the risk that fixed mortgage interest rates do not fall by all that much from current levels for terms of two years and beyond.

If I were borrowing currently, I’d probably still feel happy to fix only for a very short term. But there is a good chance I would jump to fixing for a three-year term before the middle of the year.

Having said that, it pays to note that there is considerable uncertainty regarding the growth, inflation, and interest rate impacts of the policies to be enacted by the incoming US president. For that reason, borrowers need to be careful not to get overly fixated on any particular view regarding where interest rates will head and how rapidly this year. Potential is high for all of us forecasters to be severely embarrassed.

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz